I’ve had several different people express to me the idea that the efforts for economic stimulus in the face of the current economic dislocation are misguided, because we need to “pay the price” for the excesses of the past, and that this correction will be painful, but will “put everything right” if we just let it play out.
Talk about missing the point.
Moral hazard is an important part of our economy. It’s important that returns and risk be correlated, otherwise you end up with what Krugman and others have called “lemon socialism” — privatized rewards and nationalized risk. As I write this it’s an open question what “stimulus package” the US Congress will enact; it may turn out that it in fact just amounts to an ineffective give-away of a vast amount of money.
But the idea of a massive stimulus to the economy is the right one, and it has nothing to do with nationalizing risk or rewarding bad actors. It is an attempt, through monetary policy, to prevent the major economic dislocation that would result from a deflationary spiral. This is not about making sure that the individuals who behaved like idiots don’t feel pain over the next years; this is about making sure that we all don’t end up as part of a lost economic decade like Japan experienced in the 80’s (and, at some level, still really hasn’t recovered from).
Fiscal policy hasn’t worked — the effective central bank rate in all the major western economies is 0%. This is what a liquidity trap looks like.
Massive monetary stimulus is not a particularly palatable solution. The fact of the matter is that we don’t have anything else left. Insofar as we believe that the potential for true economic dislocation exists — and people way smarter than me think that it does — we’d be fools not to use whatever tools we have.
We really don’t want to end up in the part of the economic map that is labelled “Here be dragons.” Getting back from there could take a generation.
